Erlanger Health Systems has sued the Knoxville-based company hired to manage its Dodson Avenue and Southside community health centers, after the hospital claimed the company breached its contract, then opened a competing clinic in Chattanooga this month.
Erlanger is demanding that Cherokee Health Systems pay back the $325,724 the hospital paid for its nine-month contract with the company, plus damages.
Representatives from Cherokee Health Systems in Knoxville did not return requests for comment.
Erlanger officials expected Cherokee's management would bring new vision and efficiency and help curb the centers' multimillion-dollar losses after contracting with the company in December 2011.
Erlanger operates three community health centers in Hamilton County: Southside Health Center, Dodson Avenue Community Health Center and Children's Hospital Urgent Care Clinic.
The federally qualified centers provide primary medical care, disease management and dental care for families regardless of a patient's ability to pay. They are part of Erlanger Health System but have a separate board of directors.
The contract with Erlanger had allowed Cherokee to provide the executive leadership and management of the health centers. Cherokee was paid $37,123 per month to manage the centers -- almost four times as much it had paid the centers' former executive director, Bill Hicks.
But Cherokee breached the contract, Erlanger claims. In its Hamilton County Circuit Court suit it says Cherokee "failed to lead and manage Health Centers, meet community health needs, build strong employee teams, improve operations, enhance quality, develop internal efficiencies and improve financial results."
Dr. Dennis Freeman, CEO for Cherokee and interim director of the centers, spent only two days a week at the Chattanooga facilities with no other director on site, the suit states.
Erlanger further claims that Cherokee intentionally interfered with the business relationship between Erlanger and the federal Health Resources and Services Administration, "with the improper motive of obtaining the HRSA grant for itself," the suit claims.
After an on-site visit from HRSA "The Health Centers were cited for non-compliance on the vast majority of the HRSA program requirements, the result of months of mismanagement and failed preparations by Cherokee."
The suit states that in a September 2012 meeting of the centers' governing board, Freeman recommended a new corporate structure for the health centers, which would essentially "cut Erlanger out" of the centers' agreement with the hospital.
Erlanger also claims that Cherokee provided unapproved services such as ultrasounds and behavioral health assistance that were administered by workers who were not appropriately licensed, then billed directly for the services instead of billing through Erlanger.
Soon after terminating the agreement with Cherokee in October 2012, Erlanger learned that Cherokee was opening its own health center on McCallie Avenue in Chattanooga, and recruited the community health centers' director of women's health to its new clinic.
Cherokee already has 43 clinical sites in 12 Tennessee counties.
State Rep. JoAnne Favors, D-Chattanooga, who previously served as executive director for the health centers, had originally questioned the contract with Cherokee.
Because Favors had not yet read the lawsuit Tuesday, she did not want to comment on how the relationship played out. But she did say that she had heard from many members of the community who were worried about the management transition and the loss of institutional knowledge after local staff members were replaced.
"Community members and other employees expressed concern for the stability of the health centers," she said. "Also, I felt the amount of the contract was excessive."
In an interview with the Times Free Press a year ago, Freeman said he was confident that the relationship between Erlanger and Cherokee would be for the long term.
The health centers are now being overseen by Joe Winick, senior vice president of strategic planning, Erlanger said.